Steve Romick FPA Crescent Fund Q1 letter to shareholders
Dear Shareholders:
Winners added 1.23% in the quarter and losers detracted 0.41%. Not much can be gleaned from this
other than maybe we shouldn’t have invested in companies that begin with the letters c-i-t.
Economy
Despite some modest retrenchment in quantitative easing, the world remains awash in liquidity. We
wish we could tell you how this all ends but it’s beyond us. What we do know is that just because really
smart people design something to happen doesn’t mean it will. Central bankers say they have
everything under control, but that isn’t helping us sleep at night.
Investments
We feel a little out of whack in today’s investment environment. We’d like to think it’s due to central
bank policies, but maybe not. We do know that: junk bond yields are close to an all-time low, as is the
benchmark risk-free rate and covenant-lite loans are at a record high. The once-dicey sovereign debt of
both Spain and Italy trades just 50 bps above comparable 10-year U.S. Treasuries and is apparently not
so risky anymore. And, we can only wonder what buyers of Mexico’s $1.66 billion, 100-year sterling
bond at a lowly yield of 5.75% were thinking. Equally remarkable is how few companies are trading at
low multiples and even fewer companies are trading at steep declines from their highs – as the following
two charts depict.
Suffice to say we aren’t seeing much in the way of fat pitches today, so we are comfortable just letting
someone else swing at the junk that whizzes past us. We can, however, speak to what we think we do
well – patiently wait for opportunity to invest in good assets at reasonable prices. This doesn’t mean
we’re napping in the dugout. We have selectively entered the game, recently taking advantage of our
broad mandate, as illustrated by the initiation of a handful of new positions, largely in emerging markets
and commodity sensitive businesses. We will communicate more about these when we are no longer
active in the market.
Conclusion
We sometimes hear portfolio managers grumble about the short-term thinking of their clients. Emotion
all too frequently guides investors, whether they are individuals or professionals buying and selling
stocks, bonds, mutual funds and the like. We give thanks every day that passion can overwhelm reason
and drive securities (and the markets) to be either oversold or overbought, creating a transactional
Suffice to say we aren’t seeing much in the way of fat pitches today, so we are comfortable just letting
someone else swing at the junk that whizzes past us. We can, however, speak to what we think we do
well – patiently wait for opportunity to invest in good assets at reasonable prices. This doesn’t mean
we’re napping in the dugout. We have selectively entered the game, recently taking advantage of our
broad mandate, as illustrated by the initiation of a handful of new positions, largely in emerging markets
and commodity sensitive businesses. We will communicate more about these when we are no longer
active in the market.
Conclusion
We sometimes hear portfolio managers grumble about the short-term thinking of their clients. Emotion
all too frequently guides investors, whether they are individuals or professionals buying and selling
stocks, bonds, mutual funds and the like. We give thanks every day that passion can overwhelm reason
and drive securities (and the markets) to be either oversold or overbought, creating a transactional
